GAO Cable Report Smacks Down a la Carte Regulation

Published December 1, 2003

On October 24, the U.S. General Accounting Office released its long-awaited report on cable industry rate competition, “Issues Related to Competition and Subscriber Rates in the Cable Television Industry.” Despite earlier fears of many in the cable sector, the report ended up sending Congress a very clear message regarding cable industry rate reregulation: Don’t bother.

In addition to confirming that cable industry deregulation has benefitted consumers and resulted in increased competition in the video programming marketplace, the GAO report also makes it clear that the costs of reregulating the cable sector would far outweigh the benefits. Additionally, the report should serve as the nail in the coffin of rumored a la carte regulation of the cable sector, which would require that cable operators separate and sell each individual channel they offer.

Stating the Obvious

Most of the findings in GAO’s report are fairly unsurprising and uncontroversial. For example, the report notes the rise of the Direct Broadcast Satellite industry has become a formidable competitive threat to cable and helped encourage intense rate and quality rivalry for video programming consumers.

But the real meat of the study involves a discussion about how cable operators currently package and price video programming options for consumers and the impact of those business models on overall rates. This is where the GAO could have easily tread into dangerous regulatory waters by endorsing either direct or indirect reregulation of cable rates. Instead, the GAO navigated the issue with surprising acumen and provided a balanced overview of the ins and outs of cable industry regulatory policy.

For example, the GAO report provides a very level-headed analysis of current cable industry rates. Although the report notes cable rates rose faster than the general rate of inflation over the past five years, the GAO notes many factors have contributed to the rising cost of cable service: increased programming expenditures (especially sports); substantial infrastructure investments and upgrades ($75 billion since 1996); and increased customer service expenditures. In other words, while nominal cable rates have risen over the past few years, the amount and quality of the service the industry has provided has increased.

When the number of new channels and increased viewing time are taken into account, it becomes clear that the quality-adjusted price of cable programming is actually quite reasonable and that “cable viewers appear to be substantially better off now than they were six years ago,” as Michigan State University economist Steven Wildman found in an important new study.

Moreover, the GAO alludes to the fact that the inflation rate may not be a very meaningful yardstick by which to compare cable rates anyway. Indeed, the price of many goods and services routinely rises faster than the inflation rate during any given period, but that tells us little about consumer value or welfare.

Break Up the Tiers?

Several of the channels cable operators offer have become very expensive in recent years and contributed to the rising nominal prices of the various “tiers” of service from which consumers choose. In particular, skyrocketing sports programming costs and expensive new entertainment channels are major cost drivers for cable carriers. Ultimately, those costs will get passed on to consumers when they purchase a basic or enhanced tier of cable service that includes those stations.

This fact has generated enough concern on Capitol Hill that legislation has been discussed–at least by Sen. John McCain (R-Arizona), head of the Senate Commerce Committee–which would require cable operators to breakup their programming tiers and offer consumers the ability to choose channels on an individual basis. Such an a la carte mandate would presumably give cable subscribers more choice and help lower overall rates, since consumers could reject more expensive channels that inflate the cost of any given tier.

In reality, however, mandatory a la carte regulation would have potentially devastating implications for the cable industry and consumers alike. Presumably, an a la carte mandate would require that cable operators provide each household a channel checklist (either on paper, online, or over the phone) that would need to be filled out. In a 500-channel universe, how many hours will consumers need to spend on their computers, or on the phone with cable representatives?

An “addressable converter box” would need to be installed in each home to ensure channels could be properly scrambled if they were not selected by the consumer. So say goodbye to “cable-ready” TV sets; everyone will need a set top box under an a la carte system, and that means higher costs for many households, since most currently do not have such boxes.

A la carte regulation would undermine the economic model that has driven the success of the cable sector. Program bundling helps cable companies sell advertising in the same way newspapers bundle issue sections together instead of selling them individually. Programming tiers that include a diversity of channels increase value for advertisers and consumers alike. If advertising dollars dry up, cable bills will likely increase as well.

Finally, a la carte regulation would likely curtail the overall amount of niche or specialty programming on cable networks. The current tiering approach keeps many smaller channels afloat. In fact, as a contractual matter, many programmers refuse to sell their channels to cable operators unless they are included in a specific tier. An a la carte regulatory mandate would need to nullify existing contracts in order to immediately offer consumers unrestricted channel choice. But doing so would likely cut back the overall range of consumer choices in the long term.

For these reasons, the GAO report argued that a la carte regulation would have unintended consequences and costs that would discourage consumer choice and likely result in increased rates for service. Let’s hope Senator McCain and other members of Congress heed this warning.

Adam Thierer ([email protected]) is the Cato Institute’s director of telecommunications studies.